One of the major irritants for international oil companies is when parochial national policies get in the way of their quest for profits. Nowhere is this more evident than in the global feeding frenzy to develop the Caspian’s energy assets.
The prize is enormous, as the Caspian's 143,244 square miles and attendant coastline are estimated to contain the world’s third largest reserves of oil and gas, as much as 250 billion barrels of recoverable oil, boosted by more than 200 billion barrels of potential reserves, quite aside from up to 328 trillion cubic feet of recoverable natural gas, with conservative estimates valuing its reserves at over $12 trillion, three to four times those of the North Sea.
Hard-pressed Western firms have labored since 1996 under the constraints of Washington’s Iran-Libya Sanctions Act (ILSA), designed to isolate Iran and punish naughty Western companies seeking a foothold in Iran's hydrocarbon sector. Since the 1979 Iranian Revolution it has been a core tenet of U.S. foreign policy to contain the Islamic Republic of Iran, and ILSA is the most formidable weapon in Washington's arsenal. The first U.S. sanctions against Iran followed the 1979 hostage crisis, when Washington froze about $12 billion in Iranian assets. ILSA threatens both foreign nations and companies with sanctions if they invest more than $20 million in developing Iran's energy resources, provoking protests in particular from the European Union. Some EU members note Washington's "double standard" as U.S. foreign policy persistently strives to undercut the Arab League's boycott of Israel while promoting ILSA.
Further complicating the picture was the Bush administration’s dictum that “happiness is multiple pipelines,” code for Western-financed export routes to bypass not only the Islamic Republic of Iran but Russia as well. Western companies were left to puzzle over their maps to figure out how to export first Azeri, then Kazakh and - Insallah in the future -Turkmen hydrocarbons to a thirsty world whilst obeying U.S. dictates.
Even more distressing to the world’s energy companies is the fact that significant Caspian offshore development has been stymied since the collapse of Communism in 1991 by squabbling between the four post-soviet Caspian nations of Russia, Azerbaijan, Kazakhstan and Turkmenistan with their southern neighbor Iran over how to equitably divide the Caspian’s offshore water and seabed. The lack of common accord between Moscow, Tehran, Astana, Baku and Ashgabat has effectively shelved not only mid-Caspian offshore development but the possibility of westward-running undersea pipelines to export the inland sea’s hydrocarbon largesse to Europe. Perhaps not surprisingly, once again accusatory fingers are being pointed at Iran’s uppity mullahcracy for thwarting Western interests. Given that the issue has deep historical roots however, Houston executives are going to have to wait awhile, perhaps many years, before they uncork the Moet et Chandon.
When the USSR peacefully imploded in December 1991, the Caspian’s waters were governed by the 1921 Soviet-Persian Treaty and the 1940 Treaty on Trade and Navigation, which prohibited third-party states from maintaining a presence there. While under the international legal precept of rebus sic stantibus, which maintains that international agreements remain binding only so long as the general conditions continue under which they were signed, all the Caspian nations in general continue to observe the two treaties’ overall tenets, even though obviously the two agreements had no provisions for an independent Azerbaijan, Kazakhstan or Turkmenistan.
What both treaties signally failed to address were offshore energy exploration and a bilateral mutually agreed division of the seabed. Since 1991 two polar opposite views on the issue have developed in Moscow and Tehran and despite multitudinous meetings and conferences since then, the two sides are as far apart as ever.
Stripped of chauvinism, bloviating and verbiage, Russia favors a division based on coastline mileage, while Iran had steadfastly maintained that, as the Caspian is now ringed by five nations, not two, each should receive an equitable 20 percent share of the Caspian’s waters and seabed.
Both Russia and Iran waged a fierce “hearts and minds” campaign for the allegiance of Azerbaijan, Kazakhstan and Turkmenistan to support their positions. While Astana and Baku fairly quickly fell in line behind Moscow, Turkmenistan under its mercurial president for life “Turkmenbashi (“Father of the Turkmen”) Saparmurat Niyazov blow hot and cold, sometimes favoring Russia, other times seemingly siding with Iran. Niyazov’s death in December 2006 removed a major impediment to a final agreement, but Iran battles on, convinced of the righteousness of its position.
Iran’s position is understandable, as under Russia's shoreline definition Iran would receive approximately 13 percent of the Caspian’s waters, while Kazakhstan would have the greatest share, 29 percent, with Russia receiving 19 percent, Azerbaijan 21 percent and Turkmenistan the remaining 18 percent.
Frustrated by the lack of progress, since the collapse of the Soviet Union some of its former republics have separately divided the Caspian amongst themselves. Russia and Kazakhstan agreed to divide the northern part of the sea along their common median line on 6 Jun 1998. Three years later, in January 2001 Russia and Azerbaijan made a similar division, with the two agreements now accounting for 54 percent of the Caspian’s seabed and surface waters.
What the lack of a comprehensive agreement means is that first, offshore exploration, already undertaken by all five Caspian nations, will be limited to close-in waters. Secondly, the absence of a definitive agreement effectively negates any undersea pipeline proposals however alluring to armchair strategists, as funding will be impossible to secure when title to the land is in dispute.
In the absence of agreement, the possibility for armed clashes exists. On July 23, 2001, an Iranian warship and two fighters forced a BP-Amoco research vessel chartered by the State Oil Co. of the Azerbaijani Republic to cease prospecting in Azerbaijan's offshore Caspian Araz-Alov-Sharg field, a confrontation that Baku claimed occurred 60 miles north of Iranian waters.
Energy concerns were also a major component of the Kremlin’s two Chechen wars, the first of which broke out in 1994. Quite aside from the threats to the Baku-Novorossiisk pipeline, Chechen warlord Shamil Basayev’s stated intention of uniting Chechnya with neighboring Dagestan in a unitary Muslim state would have deprived Russia of 330 miles of its total of 1,200 miles of Caspian shoreline - nearly a quarter of its presence - a significant loss in the event that Moscow’s views on shoreline division subsequently prevailed.
Further to the west, last August’s brief military confrontation between Georgia and Russia highlighted the risks of associating one's energy development too closely with Western powers, leading both Kazakhstan and Azerbaijan to engage in oil swaps with Iran to get their product to global markets, Azerbaijan for the first time.
The end result of all this is that further Western penetration of the Caspian energy market is hobbled by both Washington’s parochial policies and internal squabbles between the Caspian nations themselves.
In such a situation, who wins?
The $7.3 billion Turkmen-China 4,300-mile natural gas pipeline carrying 30 billion cubic meters of gas annually is scheduled for completion in December, while earlier this month the Kenkiyak-Kumkol pipeline, part of the Kazakhstan-China Pipeline, started commercial operations ahead of schedule. The pipeline, with initial annual capacity of 10 million tons of oil a year, connects the eastern and western part of Kazakhstan's oil transport network, allowing Kazakh Caspian oil to flow to China; talks are already underway to double the pipeline’s capacity to 20 million tons per annum.
It is proving for the Caspian nations even as they wrestle over the last hectare of Caspian seabed that happiness is indeed multiple pipelines bypassing Russia and Iran, but not quite in the way Washington expected. As Washington dictated and Moscow and Tehran wrangled, Kazakhstan and Turkmenistan negotiated with an eager partner flush with cash who left the pesky human rights lectures to their more liberal friends. For the moment and foreseeable future Beijing, Astana and Ashgabat are laughing all the way to the bank.
By. John C.K. Daly of OilPrice.com